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The market has been volatile in the fourth quarter as the Federal Reserve continued its rate hikes to normalize the interest rates. Small cap stocks have been hit hard as a result, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by nearly 7 percentage points. SEC filings and hedge fund investor letters indicate that the smart money seems to be paring back their overall long exposure since summer months, and the funds’ movements is one of the reasons why the major indexes have retraced. In this article, we analyze what the smart money thinks of KB Home (NYSE:KBH) and find out how it is affected by hedge funds’ moves.

KB Home (NYSE:KBH) was in 14 hedge funds’ portfolios at the end of the fourth quarter of 2018. KBH investors should be aware of a decrease in activity from the world’s largest hedge funds recently. There were 17 hedge funds in our database with KBH positions at the end of the previous quarter. Our calculations also showed that KBH isn’t among the 30 most popular stocks among hedge funds.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the market by 32 percentage points since May 2014 through March 12, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

We’re going to analyze the new hedge fund action surrounding KB Home (NYSE:KBH).

How have hedgies been trading KB Home (NYSE:KBH)?

Heading into the first quarter of 2019, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of -18% from the second quarter of 2018. The graph below displays the number of hedge funds with bullish position in KBH over the last 14 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Cliff Asness’s AQR Capital Management has the biggest position in KB Home (NYSE:KBH), worth close to $90.2 million, amounting to 0.1% of its total 13F portfolio. On AQR Capital Management’s heels is Ken Fisher of Fisher Asset Management, with a $63.4 million position; 0.1% of its 13F portfolio is allocated to the stock. Remaining peers with similar optimism encompass Jim Simons’s Renaissance Technologies, Anthony Bozza’s Lakewood Capital Management and Joe DiMenna’s ZWEIG DIMENNA PARTNERS.

Since KB Home (NYSE:KBH) has experienced declining sentiment from the smart money, logic holds that there were a few fund managers that decided to sell off their positions entirely last quarter. Interestingly, Andrew Weiss’s Weiss Asset Management cut the biggest stake of the 700 funds followed by Insider Monkey, comprising about $28.6 million in stock. D. E. Shaw’s fund, D E Shaw, also said goodbye to its stock, about $14.2 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest dropped by 3 funds last quarter.

Let’s also examine hedge fund activity in other stocks similar to KB Home (NYSE:KBH). These stocks are Carpenter Technology Corporation (NYSE:CRS), Hilltop Holdings Inc. (NYSE:HTH), LCI Industries (NYSE:LCII), and Allscripts Healthcare Solutions Inc (NASDAQ:MDRX). This group of stocks’ market caps are similar to KBH’s market cap.

As you can see these stocks had an average of 13.75 hedge funds with bullish positions and the average amount invested in these stocks was $108 million. That figure was $275 million in KBH’s case. Allscripts Healthcare Solutions Inc (NASDAQ:MDRX) is the most popular stock in this table. On the other hand LCI Industries (NYSE:LCII) is the least popular one with only 8 bullish hedge fund positions. KB Home (NYSE:KBH) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on KBH as the stock returned 32% and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.

Disclosure: None. This article was originally published at Insider Monkey.

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